LONDON -- The FTSE 350 is the combined list of FTSE 100 (UKX) and FTSE 250 (MCX). These are the 350 largest U.K.-listed companies by market capitalization. The index contains established blue-chip titans such as Vodafone and Shell through to smaller, high-growth mid caps such as Dialight and Fidessa.
The smaller companies are less researched by the investor community. As a result, they give more opportunities to profit from pricing anomalies. Unlike smaller companies, trade in FTSE 250 stocks is generally liquid, meaning dealing remains inexpensive.
I trawled the FTSE 350 to find what might be the best income stocks available. Each has a dividend yield above 4.5%. To reduce the chance of finding shares that will cut their payout, I restricted my search to companies that are expected to increase earnings this year. The companies below have all been increasing dividends for at least the last three years.
Yield (historic, %)
P/E (historic, %)
Market cap (in millions of pounds)
|TUI Travel (LSE: TT.L )||220||5.2||11.5||2,455|
|Balfour Beatty (LSE: BBY.L )||299||4.6||10.2||2,060|
|IG Group (LSE: IGG.L )||436||5.2||11.7||1,582|
|London & Stamford Property||120||5.9||208.0||650|
|Interserve (LSE: IRV.L )||378||5.1||11.9||479|
Four of these stood out in particular.
1. IG Group
IG Group has been increasing its dividend every year since 2006.
Through its IG Index brand, the company is the leading provider of financial spread betting in the U.K. IG Index was an industry pioneer, offering the British public cost-efficient access to gold prices in 1974.
Following a series of high-profile competitor collapses, custom is being drawn to trusted providers. IG's market position, history and stock market listing mean it is regarded as one of the safest to do business with.
IG Group thrives off market volatility. The less febrile market conditions encountered in recent months have led to a reduction in trading activity among the firm's clients. As a result, rather subdued growth is forecast. The company is expected to report a tiny increase in earnings per share (eps) for the year. The dividend is expected to increase likewise.
IG Group shares trade on a forward price-to-earnings (P/E) ratio of 11.5, falling to 10.6 for 2014. That is not a high price to pay for a market leader.
Interserve is a construction and facilities management business. Interserve seeks to target the four largest stages of an asset's life cycle: from planning and building to operation and maintenance. A typical Interserve project might be its involvement in the Cumberland Infirmary in Carlisle. Interserve supplies the hospital with a range of services including catering, cleaning, and waste management.
Much of Interserve's work is non-discretionary and long-term. This means that investors and management have a high degree of visibility of future earnings. It is these qualities that have enabled Interserve to increase dividends at the company every year since 1998.
Recent results from the company reported a 6.7% increase in interim dividend and an 3.9% advance in eps. Dividends and earnings are expected to rise for the next two years. This means that the shares trade on a forward yield of 5.2%. The 2012 P/E is 8.5, falling to 7.9 times 2013 earnings.
3. TUI Travel
TUI Travel owns a portfolio of travel and holiday brands such as airtours, LateRooms.com and Thomson. Shares in TUI are up 41% in the last three months.
The good news began with the publication of interim results in May. TUI announced a 5% increase in revenues and a 3% decline in profits. The market will have taken confidence however from the 6.7% increase in interim dividend.
Today, TUI shares trade on an expected yield of 5.3% and a forward P/E of 9.3. While the big returns may have already been made, TUI's operational strength suggests the the dividend is safe. Management provided further evidence of TUI's good health in its most recent trading statement. Although a decline in profitability was reported, management expressed its confidence in meeting expected profits for the year.
If politicians can effectively deal with the eurozone's issues, the resulting improvement in consumer confidence could benefit TUI handsomely.
4. Balfour Beatty
Balfour Beatty is one of the U.K.'s most successful listed companies. In the last five years, shareholder dividends have increased at an average rate of 11.7%, and revenues at an average of 16.2% per annum.
Balfour Beatty specializes in supplying large-scale construction and infrastructure services. North America accounts for around one third of group revenues. Australia & Asia provides 10% of sales.
The company recently cheered investors by winning a large contract from the Nuclear Decommissioning Authority.
Balfour Beatty's growth is expected to continue, delivering increased earnings per share and dividends. Consensus is for EPS to rise 23.4% in 2012, followed by a small rise the year after. The dividend is expected to grow at a slightly slower rate, averaging 5% growth for the next two years.
Balfour Beatty's success and track record are an enormous asset in winning further business. It is surprising to see such a successful operator trading on a forward P/E of just 8.2 times earnings.
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Further investment opportunities:
- The One U.K. Share Warren Buffett Loves
- How to Unearth Great Oil & Gas Shares
- 10 Shares I Should Have Bought in the Crisis
David does not own shares in any of the above companies.